Immaculate Stability (Wonkish)

He says that he’s simply offering an alternative model — and Noah Smith takes him at his word. But what he’s actually
doing is using the word “stability” to mean something completely different from the way Brad DeLong and I are using it. I don’t think there’s much point in fighting over who gets property
rights over a term, so let me pose my problem in a different way that is, in fact, equivalent to my little arrows problem. If you get what I’m saying, you’ll see the equivalence. If you don’t,
well, I can’t help you.

So, here’s how Andolfatto describes Williamson’s point:

Evidently, one of the effects of QE (in the model) is to increase the real stock of currency held by the private sector, and agents require an increase in currency’s rate of return (a fall in the inflation
rate) to induce them to hold more currency. (Remember that the results are all contingent on the way monetary and fiscal policy are modeled.)

OK, so “agents require” a fall in the inflation rate to induce them to hold more currency. How does this requirement translate into an incentive for producers of goods and services — remember, we’re
talking about stuff going on in the real economy — to raise prices less or cut them? Don’t retreat behind a screen of math — tell me a story.

I don’t think either Andolfatto or Williamson have any such story in mind; they are, in some form, invoking the doctrine of immaculate inflation.
And I don’t even think they realize that they have a problem.

Look, economics is about how people (the word “agents” is itself a kind of tribal marker) are motivated to take actions, and how those actions interact. Equilibrium is often a very convenient way to think
through all of that, and all of us sometimes use wording about what the economy “needs” or “requires” as shorthand. When I talk about the Dornbusch overshooting model of the exchange
rate, for example, I might say something like “the currency has to overshoot its long-run value, so that investors expect appreciation that offsets the interest differential.” But behind that verbal
shorthand is a story about people doing stuff: investors selling the currency because yields are down, the currency falling until it’s so low that people figure it has nowhere to go but up.

The trouble is that we have a lot of economists who apparently don’t understand why they’re doing what they’re doing; they solve their equations without even trying to picture what those equations
are supposed to be saying about the actual behavior of consumers and firms.